TEAM INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management’s Discussion and Analysis of Financial Condition and Results of Operations is provided as a supplement to the accompanying consolidated financial statements and notes to help provide an understanding of our financial condition, changes in financial condition, and results of operations. The following should be read in conjunction with Item 1 “Business,” Item 1A “Risk Factors,” Item 2 “Properties,” and Item 8 “Consolidated Financial Statements and Supplementary Data,” included in this Annual Report on Form 10-K. Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. See Item 1 at the beginning of this Annual Report. General Development of Business We are a global leading provider of integrated, digitally-enabled asset performance assurance and optimization solutions. We deploy conventional to highly specialized inspection, condition assessment, maintenance and repair services that result in greater safety, reliability and operational efficiency for our clients’ most critical assets. We conduct operations in three segments: Inspection and Heat Treating (“IHT”), Mechanical Services (“MS”) and Quest Integrity. Through the capabilities and resources in these three segments, we believe that we are uniquely qualified to provide integrated solutions involving: inspection to assess condition; engineering assessment to determine fitness for purpose in the context of industry standards and regulatory codes; and mechanical services to repair, rerate or replace based upon the client’s election. In addition, we are capable of escalating with the client’s needs, as dictated by the severity of the damage found and the related operating conditions, from standard services to some of the most advanced services and integrated asset integrity and reliability management solutions available in the industry. We also believe that we are unique in our ability to provide services in three distinct client demand profiles: (i) turnaround or project services, (ii) call-out services, and (iii) nested or run-and-maintain services. IHT provides conventional and advanced non-destructive testing (“NDT”) services primarily for the process, pipeline and power sectors, pipeline integrity management services, and field heat treating services, as well as associated engineering and condition assessment services. These services can be offered while facilities are running (on-stream), during facility turnarounds or during new construction or expansion activities. IHT also provides advanced digital imaging including remote digital video imaging, laser scanning and laser profilometry-enabled reformer care services. MS provides solutions designed to serve clients’ unique needs during both the operational (onstream) and off-line states of their assets. Our onstream services include our range of standard to custom-engineered leak repair and composite solutions; emissions control and compliance; hot tapping and line stopping; and on-line valve insertion solutions, which are delivered while assets are in an operational condition, which maximizes client production time. Asset shutdowns can be planned, such as a turnaround maintenance event, or unplanned, such as those due to component failure or equipment breakdowns. Our specialty maintenance, turnaround and outage services are designed to minimize client downtime and are primarily delivered while assets are off-line and often through the use of cross-certified technicians, whose multi-craft capabilities deliver the production needed to achieve tight time schedules. These critical services include on-site field machining; bolted-joint integrity; vapor barrier plug testing; and valve management solutions. Quest Integrity provides integrity and reliability management solutions for the process, pipeline and power sectors. These solutions encompass three broadly-defined disciplines: (1) highly specialized in-line inspection services for historically unpiggable process piping and pipelines using proprietary in-line inspection tools and analytical software; and (2) advanced engineering and condition assessment services through a multi-disciplined engineering team and related lab support. We market our services to companies in a diverse array of heavy industries, which include: • Energy (refining, power, renewables, nuclear and liquefied natural gas); • Manufacturing and Process (chemical, petrochemical, pulp and paper industries, manufacturing, automotive and mining); 26 Table of Content • Midstream and Others (valves, terminals and storage, pipeline and offshore oil and gas); • Public Infrastructure (amusement parks, bridges, ports, construction and building, roads, dams and railways); and • Aerospace and Defense. In January 2021, we announced a strategic reorganization. The new streamlined structure supports our global operations with greater focus on further improving operational and financial performance through three new operating groups: Inspection and Heat Treating Group (the “IHT Group”), Mechanical & Onstream Services group (the “MOS Group”) and Asset Integrity & Digital (the “AID Group”). The IHT Group, which is included in the IHT segment, is dedicated to growing its stable nested footprint as regulatory compliance requirements increase, expanding turnaround activity, and diversifying its end markets globally, such as through increased investment in the Aerospace business line. The MOS Group, which is included in the MS segment, continues to target turnarounds and capital projects, and improve performance, efficiency, and longevity of aging critical assets. The MOS Group is primed to grow with the industry recovery led by the high demand of maintenance and call-out work. The AID Group, which is included in our Quest Integrity segment, will focus on expanding mechanical and pipeline integrity, risk-based inspection, remote visual inspection, and digital platform. The AID Group will also optimize our research and development activities, including product and technology development. These changes had no effect on our reportable segments. Significant Factors Impacting Results and Recent Developments Our revenues, gross margins and other results of operations can be influenced by a variety of factors in any given period, including those described in Cautionary Note Regarding Forward-Looking Statements above and Part 1, Item 1A. “Risk Factors” included in this report have caused fluctuations in our results in the past and are expected to cause fluctuations in our results in the future. Additional information with respect to certain factors are described below. COVID-19 Pandemic and Market Conditions Update . The impact of COVID-19 and, more recently the Delta and Omicron variants of the COVID-19 virus, continues to affect our workforce and operations, as well as the operations of our clients, suppliers and contractors. During this period, we have continued to focus on the following key priorities: • the health and safety of our employees and business continuity; • the alignment of our business to the near term market dynamics and demand for our services; and • our end market revenue diversification strategy. The ultimate duration and economic impact of the COVID-19 pandemic remains unclear. However, we believe the increased availability and administration of COVID-19 vaccines, easing of pandemic related restrictions, reopening of economies, and increasing commodity prices are positive signs of broader economic recovery. The extent of COVID-19’s effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic (including any resurgences), impact of the new COVID-19 variants and the continued rollout and acceptance of COVID-19 vaccines, and the level of social and economic restrictions imposed in the United States and abroad in an effort to curb the spread of the virus, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. Under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), we qualified to defer the employer portion of social security taxes incurred through the end of calendar 2020. As of December 31, 2021, we have deferred employer payroll taxes of $14.1 million. We paid $7.0 million of the deferred payroll taxes in January 2022 with the remaining balance due at the end of 2022. Additionally, other governments in jurisdictions where we operate passed legislation to provide employers with relief programs, which include wage subsidy grants, deferral of certain payroll related expenses and tax payments and other benefits. We elected to treat qualified government subsidies from Canada and other governments as offsets to the related expenses. As a result, we recognized $6.2 million and $1.5 million as a reduction to operating expenses and selling, general and administrative expenses, respectively, during the twelve months ended December 31, 2021. As of December 31, 2021, we also deferred certain payroll related expenses and tax payments of $3.2 million under other foreign government programs which will be due in 2022. Goodwill Impairment. As discussed in Note 8 of the consolidated financial statements further below, we recognized a non-cash goodwill impairment charge during the nine months ended September 30, 2021 of $55.8 million for the MS operating segment and non-cash goodwill impairment charge during the three months ended December 31, 2021 of $8.8 million for the Quest Integrity operating segment. Total goodwill impairment charges for the twelve months ended December 31, 2021 was $64.6 million. These charges were a result of goodwill impairment test that was triggered as a result of certain impairment indicators that were present during the quarter, primarily related to the continued curtailment of operations, decline in our 27 Table of Content forecast, continued declines in our stock price, reporting unit operating losses, and continued declines in the reporting units’ net sales compared to forecast. Recent Financing Transactions. As more fully described below under “Liquidity and Capital Resources”, on February 11, 2022, we entered into a credit agreement with the lender parties thereto, and Eclipse Business Capital, LLC, a Delaware limited liability company, as agent, (“Eclipse”) (such agreement, the “ABL Credit Agreement”). Available funding commitments to the Company under the ABL Credit Agreement, subject to certain conditions, include a revolving credit line in an amount of up to $130.0 million to be provided by certain affiliates of Eclipse (the “Revolving Credit Loans”), with a $35.0 million sublimit for swingline borrowings and a $26.0 million sublimit for issuances of letters of credit, and a delayed draw term loan of up to an incremental $35.0 million (the “Delayed Draw Term Loans”) to be provided by Corre Partners Management, LLC and certain of its affiliates (“Corre”) (the “ABL Credit Facility”). The ABL Credit Facility matures and all outstanding amounts become due and payable on February 11, 2025, however, if our Notes, which mature on August 1, 2023, have an aggregate principal amount of $10 million or more outstanding 120 days prior to their maturity date (the “Trigger Date”), the ABL Credit Facility will be terminated as of the Trigger Date. The proceeds of the loans under the ABL Credit Agreement were used to, among other things, pay off the amounts owed under the Credit Agreement, which was repaid and terminated in full on February 11, 2022. In connection with the transactions contemplated by the ABL Credit Agreement, Corre, agreed to provide the Company incremental financing, totaling approximately $55.0 million, consisting of (i) $35.0 million Delayed Draw Term Loans under the ABL Credit Facility; (ii) $10.0 million from Corre in the form of the February 2022 Delayed Draw Term Loan (as defined in the Subordinated Term Loan Credit Agreement (as defined below)) on a pari passu basis with the existing loans issued pursuant to the Subordinated Term Loan Credit Agreement; and (iii) $10.0 million through an issuance of 11,904,762 shares of our common stock, to Corre Opportunities Qualified Master Fund, LP, Corre Horizon Fund, LP and Corre Horizon II Fund, LP at a price of $0.84 per share. 28 Table of Content Results of Operations The following is a comparison of our results of operations for the twelve months ended December 31, 2021 compared to December 31, 2020 and for the twelve months ended December 31, 2020 compared to December 31, 2019. Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 The following table sets forth the components of revenue and operating income (loss) from our operations for the years ended December 31, 2021 and 2020 (in thousands): Twelve Months Ended December 31, Increase (Decrease) 2021 2020 $ % Revenues by business segment: IHT $ 415,371 $ 374,740 $ 40,631 10.8 % MS 378,826 392,484 (13,658) (3.5) % Quest Integrity 80,356 85,315 (4,959) (5.8) % Total revenues $ 874,553 $ 852,539 $ 22,014 2.6 % Operating income (loss): IHT 1 $ 12,997 $ (174,638) $ 187,635 NM 4 MS 2 (47,728) 25,879 (73,607) NM 4 Quest Integrity 3 900 16,474 (15,574) (94.5) % Corporate and shared support services (92,151) (85,077) (7,074) (8.3) % Total operating income (loss) $ (125,982) $ (217,362) $ 91,380 42.0 % Interest expense, net $ (46,308) $ (29,818) $ (16,490) (55.3) % Loss on warrants (59) — (59) NM 4 Loss on debt extinguishment and modification — (2,224) 2,224 NM 4 Other expense, net (2,461) (2,514) 53 2.1 % Loss before income taxes $ (174,810) $ (251,918) $ 77,108 30.6 % (Provision) benefit for income taxes (11,209) 14,715 (25,924) NM 4 Net loss $ (186,019) $ (237,203) $ 51,184 21.6 % _________________ 1 Includes goodwill impairment charge of $191.8 million for the twelve months ended December 31, 2020. 2 Includes goodwill impairment charge of $55.8 million for the twelve months ended December 31, 2021. 3 Includes goodwill impairment charge of $8.8 million for the twelve months ended December 31, 2021. 4 NM - Not meaningful Revenues. Total revenues increased $22.0 million or 2.6% from the same period in the prior year. Excluding the favorable impact of $15.0 million due to foreign currency exchange rate changes, total revenues increased by $7.0 million, IHT revenues increased by $35.1 million, MS revenues decreased by $21.4 million and Quest Integrity revenues decreased by $6.7 million. The increase in revenues in IHT is due to increased turnaround and project work in both the US and Canada. The decrease in revenue for MS was primarily due to decrease in maintenance activities and non-recurring projects from the prior year. The favorable impacts of foreign exchange rate changes are primarily due to the weakening of the U.S. dollar relative to the foreign currencies to which we have exposure during the current year. Operating loss. Overall operating loss was $126.0 million, compared to an operating loss of $217.4 million in the prior year. The overall decrease in operating loss is attributable to IHT, which experienced an increase in operating income of $187.6 million due to a non-cash goodwill impairment charge recorded during the first quarter of 2020, arising from the impacts of COVID-19. 29 Table of Content Operating loss for the current year includes net expenses totaling $83.9 million that we do not believe are indicative of our core operating activities, while the same period in the prior year included $205.2 million of such items. The detail of non-core expenses reflected in operating income (loss) are as follows (unaudited) (in thousands): IHT MS Quest Integrity Corporate and shared support services Total Twelve Months Ended December 31, 2021 Professional fees and other 1 $ — $ — $ — $ 8,882 $ 8,882 Legal costs 2 — — — 7,243 7,243 Severance charges,net 3 661 524 357 1,564 3,106 Goodwill impairment charge — 55,837 8,795 — 64,632 Total $ 661 $ 56,361 $ 9,152 $ 17,689 $ 83,863 Twelve Months Ended December 31, 2020 Professional fees and other 1 $ — $ — $ — $ 5,062 $ 5,062 Legal costs 2 — — — 1,947 1,947 Severance charges,net 3 1,572 3,048 517 740 5,877 Goodwill impairment charge 191,788 — — — 191,788 Natural disaster costs 4 21 479 — — 500 Total $ 193,381 $ 3,527 $ 517 $ 7,749 $ 205,174 ______________________ 1 Consists primarily of professional fees and other costs for assessment of corporate and support cost structures. For the twelve months ended December 31, 2021, includes $1.9 million of costs associated with the Operating Group Reorganization, $3.9 million related to costs associated with debt financing, $2.8 million of corporate support costs, and $0.3 million associated with the OneTEAM program (exclusive of restructuring costs). For the twelve months ended December 31, 2020, includes $3.2 million associated with the OneTEAM program (exclusive of restructuring costs). 2 For the twelve months ended December 31, 2021, primarily relates to accrued legal matters and other legal fees. For the twelve months ended December 31, 2020, primarily relates to international legal and internal control review matters. 3 For the twelve months ended December 31, 2021, includes $2.9 million of severance charges associated with the Operating Group Reorganization and $0.2 million associated with other severances. For the twelve months ended December 31, 2020, $3.4 million of severance charges were associated with the OneTEAM program and $2.5 million in other severance charges were due to the impact of COVID-19. 4 Amount represents the insurance deductible amount for hurricane damage incurred during the period. The detail of operating income (loss) excluding non-core expenses are as follow (unaudited) (in thousands): Twelve Months Ended December 31, Increase (Decrease) 2021 2020 $ % Operating income (loss), excluding non-core expenses: IHT $ 13,658 $ 18,743 $ (5,085) (27.1) % MS 8,633 29,406 (20,773) (70.6) % Quest Integrity 10,052 16,991 (6,939) (40.8) % Corporate and shared support services (74,462) (77,328) 2,866 3.7 % Total operating income (loss), excluding non-core expenses $ (42,119) $ (12,188) $ (29,931) NM 1 ______________________ 1 NM - Not meaningful Excluding the impact of non-core expenses, the overall decrease in operating income is primarily attributable to our IHT, MS and Quest Integrity segments, which experienced a decrease in operating income of $5.1 million, $20.8 million and $6.9 million, respectively. The lower operating income in Quest Integrity reflects lower activity levels due to travel restrictions as a result of COVID-19 and decline in overall activity levels. The operating loss increase in MS was largely attributable to a decrease in maintenance activities and non-recurring projects from the prior year. The prior year comparable is also challenging given that the pandemic did not have a material impact on the first three months of operations in 2020 as well as inflationary cost pressures in 2021. These movements were partially offset by a decrease in corporate and shared support service expenses of $2.9 million, which was driven primarily by lower payroll expenses. 30 Table of Content Other (income) expense, net. Other expense, net increased $0.1 million, from the same period in the prior year, primarily from foreign currency transaction losses in the current year compared to the prior year. Foreign currency transaction losses in the current year period reflect the effects of fluctuations in the U.S. Dollar relative to the foreign currencies to which we have exposure. Other expense, net also include certain components of our net periodic pension cost (credit) and a gain on disposal . Loss on debt extinguishment and modification. In December 2020, we entered into lending arrangements, repaid all amounts outstanding under our prior credit facility (the “Credit Facility”) and retired $136.9 million par value of our 5.00% Convertible Senior Notes due 2023 (the “Notes”). In connection with these transactions, we recognized a loss of $2.2 million, comprised of approximately $4.4 million in unamortized debt issuance costs on the Credit Facility and expenses associated with the extinguishment of the Notes, partially offset by a $2.2 million gain on extinguishment of the Notes. Loss on warrants. In November 2021, the Company entered into an Amended and Restated Common Stock Purchase Warrant (the “A&R Warrant”) with APSC Holdco II, L.P. (“APSC Holdco”) pursuant to which the warrant issued in December 2020 to Atlantic Park Strategic Capital Fund, L.P. (“APSC”) to purchase up to 3,582,949 shares of Company common stock, which was initially exercisable at the holder’s option at any time, in whole or in part, until June 14, 2028, at an exercise price of $7.75 per share (the “Existing Warrant”) was amended and restated to provide for the purchase of up to 4,082,949 shares of Company common stock (which includes 500,000 of the shares of common stock issuable pursuant to additional warrants to APSC, providing for the purchase of an aggregate of 1,417,051 shares of our common stock (the “APSC Warrants”)) and to reduce the exercise price of the Existing Warrant to $1.50 per share. In connection with this transaction, reclassification of the A&R Warrant from a liability classification to equity post receipt of NYSE approval with the related change in fair value being recognized in the income statement resulted in a loss of $0.1 million. Taxes. The provision for income tax was $11.2 million on the pre-tax loss from continuing operations of $174.8 million in the current year compared to the benefit for income tax of $14.7 million on pre-tax loss from continuing operations of $251.9 million in the prior year. The effective tax rate was a provision of 6.4% for the year ended December 31, 2021 and a benefit of 5.8% for the year ended December 31, 2020.The higher effective rate in 2021 is primarily attributable to the goodwill impairment loss taken during the year, a portion of which is not deductible for tax purposes and an increase in the valuation allowance. 31 Table of Content Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 The following table sets forth the components of revenue and operating income (loss) from our operations for the years ended December 31, 2020 and 2019 (in thousands): Twelve Months Ended December 31, Increase (Decrease) 2020 2019 $ % Revenues by business segment: IHT $ 374,740 $ 512,950 $ (138,210) (26.9) % MS 392,484 535,372 (142,888) (26.7) % Quest Integrity 85,315 114,992 (29,677) (25.8) % Total revenues $ 852,539 $ 1,163,314 $ (310,775) (26.7) % Operating income (loss): IHT 2 $ (174,638) $ 24,084 $ (198,722) NM 1 MS 25,879 55,385 (29,506) (53.3) % Quest Integrity 16,474 28,757 (12,283) (42.7) % Corporate and shared support services (85,077) (110,372) 25,295 22.9 % Total operating income (loss) $ (217,362) $ (2,146) $ (215,216) NM 1 Interest expense, net $ (29,818) $ (29,713) $ (105) (0.4) % Loss on debt extinguishment and modification (2,224) (279) (1,945) NM 1 Other expense, net (2,514) (715) (1,799) NM 1 Loss before income taxes $ (251,918) $ (32,853) $ (219,065) NM 1 Benefit for income taxes 14,715 436 $ 14,279 NM 1 Net loss $ (237,203) $ (32,417) $ (204,786) NM 1 _____________________ 1 Not meaningful 2 Includes goodwill impairment charge of $191.8 million for the twelve months ended December 31, 2020. Revenues. Total revenues declined $310.8 million or 26.7% from the same period in the prior year. Excluding the unfavorable impact of $2.3 million due to foreign currency exchange rate changes, total revenues decreased by $308.5 million, IHT revenues decreased by $137.9 million, MS revenues decreased by $141.5 million and Quest Integrity revenues decreased by $29.1 million. Decreased activity levels in IHT, MS and Quest Integrity were primarily due to volumes being negatively impacted by the outbreak of COVID-19 and the oversupplied oil market causing certain clients to temporarily close facilities and/or curtail operations, resulting in the postponement of client projects and lower demand for our services. Without the COVID-19 pandemic effects, we would typically benefit for a period of 12 to 18 months following a refining utilization rate drop, however, current market dynamics have delayed the demand growth for our products and services. The unfavorable impacts of foreign exchange rate changes are primarily due to the strengthening of the U.S. dollar relative to the foreign currencies to which we have exposure during this period. Operating income (loss). Overall operating loss was $217.4 million, compared to an operating loss of $2.1 million in the year ended December 31, 2019. The increase in operating loss was primarily attributable to a non-cash goodwill impairment charge of $191.8 million during the first quarter of 2020, which was triggered by the existence of impairment indicators, including the decline in our forecasts as a result of the COVID-19 pandemic and the related decline in market conditions in our IHT operating segment. 32 Table of Content Operating income (loss) for the year ended December 31, 2020 included net expenses totaling $205.2 million that we do not believe are indicative of our core operating activities, while the same period in the prior year included $23.3 million of such items, as detailed by segment in the table below (in thousands): Expenses reflected in operating income (loss) that are not indicative of our core operating activities (unaudited) (in thousands): IHT MS Quest Integrity Corporate and shared support services Total Twelve Months Ended December 31, 2020 Professional fees and other 1 $ — $ — $ — $ 5,062 $ 5,062 Legal costs 2 — — — 1,947 1,947 Severance charges, net 3 1,572 3,048 517 740 5,877 Goodwill impairment charge 191,788 — — — 191,788 Natural disaster costs 4 21 479 — — 500 Total $ 193,381 $ 3,527 $ 517 $ 7,749 $ 205,174 Twelve Months Ended December 31, 2019 Professional fees and other 1 $ — $ — $ — $ 16,448 $ 16,448 Legal costs 2 — — — 5,167 $ 5,167 Restructuring and other related charges 3 249 418 62 947 1,676 Total $ 249 $ 418 $ 62 $ 22,562 $ 23,291 ______________________ 1 Consists primarily of professional fees and other costs for assessment of corporate and support cost structures. For the twelve months ended December 31, 2020 and 2019, includes $3.2 million and $12.3 million, respectively, associated with the OneTEAM program (exclusive of restructuring costs). 2 For the twelve months ended December 31, 2020, primarily relates to accrued costs due to international legal and internal control review matters. For the twelve months ended December 31, 2019, primarily relates to accrued costs due to the resolution of a legal matter. 3 For the twelve months ended December 31, 2020 and twelve months ended December 31, 2019, includes $3.4 million and $1.7 million of severance charges associated with the OneTEAM program, including international restructuring under the OneTEAM program. For the twelve months ended December 31, 2020, $2.5 million in other severance charges were due to the impact of COVID-19. 4 Amount represents the insurance deductible amount for hurricane damage incurred during the period. The detail of operating income (loss) excluding non-core expenses are as follow (unaudited) (in thousands): Twelve Months Ended December 31, Increase (Decrease) 2020 2019 $ % Operating income (loss), excluding non-core expenses: IHT $ 18,743 $ 24,333 $ (5,590) (23.0) % MS 29,406 55,803 (26,397) (47.3) % Quest Integrity 16,991 28,819 (11,828) (41.0) % Corporate and shared support services (77,328) (87,810) 10,482 11.9 % Total operating income (loss), excluding non-core expenses $ (12,188) $ 21,145 $ (33,333) (157.6) % Excluding the impact of non-core expenses, the overall decrease in operating income is primarily attributable to our MS and Quest Integrity segments, which experienced a decrease in operating income of $26.4 million and $11.8 million, respectively. The lower operating income in MS and Quest Integrity reflects lower activity levels due to a decline in market conditions as a result of the COVID-19 pandemic and the decline in oil prices. These movements were partially offset by a decrease in corporate and shared support service expenses of $10.5 million, which was driven primarily by lower payroll and noncash compensation expenses. Other (income) expense, net. Other expense, net increased $1.8 million, or 252%, from the same period in the prior year, primarily from foreign currency transaction losses in the current year compared to the prior year. Foreign currency transaction losses in the current year period reflect the effects of fluctuations in the U.S. Dollar relative to the foreign currencies to which we have exposure. Other expense, net also include certain components of our net periodic pension cost (credit). Loss on debt extinguishment and modification. In December 2020, we entered into lending arrangements, repaid all amounts outstanding under our prior credit facility (the “Credit Facility”) and retired $136.9 million par value of our 5.00% Convertible Senior Notes due 2023 (the “Notes”). In connection with these transactions, we recognized a loss of $2.2 million, comprised of approximately $4.4 million in unamortized debt issuance costs on the Credit Facility and expenses associated with 33 Table of Content the extinguishment of the Notes, partially offset by a $2.2 million gain on extinguishment of the Notes. See further discussion of our debt in Note 11- Long-term debt, to our consolidated financial statements included in this report. The write-off of debt issuance costs of $0.3 million for the year ended December 31, 2019 was associated with a reduction in capacity of the revolving portion of the Credit Facility in July 2019. Taxes. The benefit for income tax was $14.7 million on the pre-tax loss from continuing operations of $251.9 million in the current year compared to the benefit for income tax of $0.4 million on pre-tax loss from continuing operations of $32.9 million in the prior year. The effective tax rate was a benefit of 5.8% for the year ended December 31, 2020 and a benefit of 1.3% for the year ended December 31, 2019.The higher effective rate benefit in 2020 is primarily attributable to the tax benefit related to the goodwill impairment loss taken during the year, a portion of which is not deductible for tax purposes, and tax benefits recorded as a result of certain provisions within the CARES Act, enacted on March 27, 2020. The rate was also positively impacted by a decrease in valuation allowance on the expected realizability of the Company’s deferred tax assets for net operating loss carryforwards in certain foreign jurisdictions in which the Company operates. These benefits were offset by an increase in valuation allowance on the expected realizability of the Company’s deferred tax assets for federal and state tax net operating loss carryforwards. The CARES Act was enacted as a stimulus package to mitigate the negative financial impact of the COVID-19 pandemic on the economy. A provision in the CARES Act allows for the carryback of net operating losses generated in certain tax years, which were previously only allowed to be carried forward, to recover income taxes paid at a higher statutory tax rate than the rate under current law. A tax benefit in the amount of $7.3 million was recorded during the year related to the carryback of net operating losses. Non-GAAP Financial Measures and Reconciliations We use supplemental non-GAAP financial measures which are derived from the consolidated financial information including adjusted net income (loss); adjusted net income (loss) per diluted share, earnings before interest and taxes (“EBIT”); adjusted EBIT (defined below); adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”) and free cash flow to supplement financial information presented on a GAAP basis. We define adjusted net income (loss), adjusted net income (loss) per diluted share and adjusted EBIT to exclude the following items: costs associated with our OneTEAM program, costs associated with the Operating Group Reorganization (as defined in Note 17 to the consolidated financial statements), non-routine legal costs and settlements, restructuring charges, certain severance charges, goodwill impairment charges and certain other items that we believe are not indicative of core operating activities. Consolidated adjusted EBIT, as defined by us, excludes the costs excluded from adjusted net income (loss) as well as income tax expense (benefit), interest charges, foreign currency (gain) loss, and items of other (income) expense. Consolidated adjusted EBITDA further excludes from consolidated adjusted EBIT depreciation, amortization and non-cash share-based compensation costs. Segment adjusted EBIT is equal to segment operating income (loss) excluding costs associated with our OneTEAM program, costs associated with the Operating Group Reorganization, non-routine legal costs and settlements, restructuring charges, certain severance charges, goodwill impairment charges and certain other items as determined by management. Segment adjusted EBITDA further excludes from segment adjusted EBIT depreciation, amortization, and non-cash share-based compensation costs. Free cash flow is defined as net cash provided by (used in) operating activities minus capital expenditures. Management believes these non-GAAP financial measures are useful to both management and investors in their analysis of our financial position and results of operations. In particular, adjusted net income (loss), adjusted net income (loss) per diluted share, consolidated adjusted EBIT, and consolidated adjusted EBITDA are meaningful measures of performance which are commonly used by industry analysts, investors, lenders and rating agencies to analyze operating performance in our industry, perform analytical comparisons, benchmark performance between periods, and measure our performance against externally communicated targets. Our segment adjusted EBIT and segment adjusted EBITDA is also used as a basis for the Chief Operating Decision Maker to evaluate the performance of our reportable segments. Free cash flow is used by our management and investors to analyze our ability to service and repay debt and return value directly to stakeholders. Non-GAAP measures have important limitations as analytical tools, because they exclude some, but not all, items that affect net earnings and operating income. These measures should not be considered substitutes for their most directly comparable U.S. GAAP financial measures and should be read only in conjunction with financial information presented on a GAAP basis. Further, our non-GAAP financial measures may not be comparable to similarly titled measures of other companies who may calculate non-GAAP financial measures differently, limiting the usefulness of those measures for comparative purposes. The liquidity measure of free cash flow does not represent a precise calculation of residual cash flow available for discretionary expenditures. Reconciliations of each non-GAAP financial measure to its most directly comparable GAAP financial measure are presented below. 34 Table of Content The following tables set forth the reconciliation of Adjusted Net Income (Loss), EBIT and EBITDA to their most comparable GAAP financial measurements: TEAM, INC. AND SUBSIDIARIES RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (unaudited, in thousands except per share data) Three Months Ended December 31, Twelve Months Ended December 31, 2021 2020 2021 2020 Adjusted Net Income (Loss): Net loss $ (43,053) $ (14,875) $ (186,019) $ (237,203) Professional fees and other 1 5,775 1,076 8,882 5,062 Legal costs 2 398 21 7,243 1,947 Severance charges, net 3 302 876 3,106 5,877 Natural disaster costs 4 — — — 500 Loss on warrants 59 59 Loss on debt extinguishment — 2,224 — 2,224 Goodwill impairment charge 8,795 — 64,632 191,788 Tax impact of adjustments and other net tax items 5 (17) (881) (385) (16,491) Adjusted net loss $ (27,741) $ (11,559) $ (102,482) $ (46,296) Adjusted net loss per common share: Basic and diluted $ (0.89) $ (0.38) $ (3.31) $ (1.51) Consolidated Adjusted EBIT and Adjusted EBITDA: Net loss $ (43,053) $ (14,875) $ (186,019) $ (237,203) Provision (benefit) for income taxes 1,785 1,097 11,209 (14,715) Interest expense, net 17,340 7,971 46,308 29,818 Foreign currency loss (gain) 6 1,400 1,117 5,674 2,758 Pension expense (credit) 7 (102) 137 (622) (244) Gain on disposal (2,591) — (2,591) — Loss on debt extinguishment and modification — 2,224 — 2,224 Loss on warrants 59 — 59 — Professional fees and other 1 5,775 1,076 8,882 5,062 Legal costs 2 398 21 7,243 1,947 Severance charges, net 3 302 876 3,106 5,877 Natural disaster costs 4 — — — 500 Goodwill impairment charge 8,795 — 64,632 191,788 Consolidated Adjusted EBIT (9,892) (356) (42,119) (12,188) Depreciation and amortization Amount included in operating expenses 4,819 5,588 20,210 23,105 Amount included in SG&A expenses 5,283 5,611 21,308 22,803 Total depreciation and amortization 10,102 11,199 41,518 45,908 Non-cash share-based compensation costs 1,437 2,234 7,013 6,307 Consolidated Adjusted EBITDA $ 1,647 $ 13,077 $ 6,412 $ 40,027 Free Cash Flow: Cash provided by (used in) operating activities $ 408 $ 32,599 $ (35,453) $ 52,764 Capital expenditures (5,229) (3,274) (17,605) (19,958) Free Cash Flow $ (4,821) $ 29,325 $ (53,058) $ 32,806 ____________________________________ 1 For the three and twelve months ended December 31, 2021, includes $0.2 million and $1.9 million, respectively, of costs associated with the Operating Group Reorganization (exclusive of restructuring costs). There were also $3.9 million related to costs associated with debt financing, $2.8 million of corporate support costs, and $0.3 million associated with the OneTEAM program (exclusive of restructuring costs). For the three and twelve months ended December 31, 2020, includes $0.6 million and $3.2 million, respectively, associated with the OneTEAM program (exclusive of restructuring costs). 2 For the three and twelve months ended December 31, 2021, primarily relates to accrued legal matters and other legal fees. For the three months and twelve months ended December 31, 2020, primarily relates to costs associated with international legal matters. 3 For the three months and twelve months ended December 31, 2021, $0.3 million and $2.9 million, respectively, associated with the Operating Group Reorganization and other continuing restructuring measures. For the three and twelve months ended December 31, 2020, severance charges are associated with the OneTEAM program, including international operations. 35 Table of Content 4 Amount represents the insurance deductible for hurricane damage incurred for the twelve months ended December 31, 2020. 5 Represents the tax effect of the adjustments. Beginning in Q2 2021, we now use the statutory tax rate, net of valuation allowance by legal entity to determine the tax effect of the adjustments. Prior to Q2 2021, we used an assumed marginal tax rate of 21% except for the adjustment of the goodwill impairment charge in Q1 2020 for which the actual tax impact was used. We have updated the prior period tax impact to use the statutory tax rate by legal entity, net of valuation allowance. 6 Represents foreign currency gain/loss. For prior periods, includes other nominal fees. 7 Represents pension expense (credit) for the U.K. pension plan based on the difference between the expected return on plan assets and the cost of the discounted pension liability. The pension plan has had no new participants added since the plan was frozen in 1994 and accruals for future benefits ceased in connection with a plan curtailment in 2013. TEAM, INC. AND SUBSIDIARIES RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (Continued) (unaudited, in thousands) Three Months Ended December 31, Twelve Months Ended December 31, 2021 2020 2021 2020 Segment Adjusted EBIT and Adjusted EBITDA: IHT Operating income (loss) $ 2,173 $ 5,052 $ 12,997 $ (174,638) Severance charges, net 1 86 446 661 1,572 Natural disaster costs 2 — — — 21 Goodwill impairment charge — — — 191,788 Adjusted EBIT 2,259 5,498 13,658 18,743 Depreciation and amortization 3,071 3,553 12,959 14,891 Adjusted EBITDA $ 5,330 $ 9,051 $ 26,617 $ 33,634 MS Operating income (loss) $ 3,071 $ 5,377 $ (47,728) $ 25,879 Severance charges, net 1 30 55 524 3,048 Natural disaster costs 2 — — — 479 Goodwill impairment loss — — 55,837 — Adjusted EBIT 3,101 5,432 8,633 29,406 Depreciation and amortization 5,068 5,457 20,500 21,854 Adjusted EBITDA $ 8,169 $ 10,889 $ 29,133 $ 51,260 Quest Integrity Operating income (loss) $ (6,252) $ 6,673 $ 900 $ 16,474 Severance charges, net 1 83 191 357 517 Goodwill impairment loss 8,795 — 8,795 — Adjusted EBIT 2,626 6,864 10,052 16,991 Depreciation and amortization 600 845 2,616 3,587 Adjusted EBITDA $ 3,226 $ 7,709 $ 12,668 $ 20,578 Corporate and shared support services Net loss $ (44,636) $ (31,977) $ (154,779) $ (104,918) Provision (benefit) for income taxes 1,785 1,097 11,209 (14,715) Interest expense, net 17,340 7,971 46,308 29,818 Loss on debt extinguishment and modification — 2,224 — 2,224 Foreign currency loss (gain) 3 1,400 1,117 5,674 2,758 Pension expense (credit) 4 (102) 137 (622) (244) Loss on warrants 59 — 59 — Professional fees and other 5 5,775 1,076 8,882 5,062 Legal costs 6 398 21 7,243 1,947 Severance charges, net 1 103 184 1,564 740 Adjusted EBIT (17,878) (18,150) (74,462) (77,328) Depreciation and amortization 1,363 1,344 5,443 5,576 Non-cash share-based compensation costs 1,437 2,234 7,013 6,307 Adjusted EBITDA $ (15,078) $ (14,572) $ (62,006) $ (65,445) ___________________ 36 Table of Content 1 Primarily relates to severance charges incurred associated with the Operating Group Reorganization and other continuing restructuring measures for the three and twelve months ended December 31, 2021. For the three and twelve months ended December 31, 2020, relates to severance charges associated with the OneTEAM program, including international restructuring under the OneTEAM program. 2 Amount represents the insurance deductible for hurricane damage incurred for the twelve months ended December 31, 2020. 3 Represents foreign currency gain/loss. For prior periods, includes other nominal fees. 4 Represents pension expense (credit) for the U.K. pension plan based on the difference between the expected return on plan assets and the cost of the discounted pension liability. The pension plan has had no new participants added since the plan was frozen in 1994 and accruals for future benefits ceased in connection with a plan curtailment in 2013. 5 For the three and twelve months ended December 31, 2021, includes $0.2 million and $1.9 million, respectively, of costs associated with the Operating Group Reorganization (exclusive of restructuring costs). For the three and twelve months ended December 31, 2020, includes $0.6 million and $3.2 million, respectively, associated with the OneTEAM program (exclusive of restructuring costs). 6 For the three and twelve months ended December 31, 2021, primarily relates to accrued legal matters and other legal fees. For the three and twelve months ended December 31, 2020, primarily relates to costs associated with international legal matters. Liquidity and Capital Resources Financing for our operations consists primarily of our ABL Credit Facility, Term Loan, Subordinated Term Loan (defined below) and cash flows attributable to our operations. Our principal uses of cash are for working capital needs and operations. We have suffered recurring operating losses related to COVID-19 pandemic and related economic repercussions, and difficult market conditions. Subsequent to year-end, we had limited borrowing capacity to fund our increasing working capital needs. In response to the above, (i) we have entered into the Recent Financing Transactions (as further described in Note 1 - Summary of Significant Accounting Policies and Practices) to address our near-term liquidity needs; and (ii) we have taken definitive actions to reduce costs, improve operations, profitability, and liquidity, and position the Company for future growth. Our ability to maintain compliance with the financial covenants contained in ABL Credit Facility, Term Loan Credit Agreement, and Subordinated Term Loan Credit Agreement is dependent upon our future operating performance and future financial condition, both of which are subject to various risks and uncertainties. The effects of the COVID-19 pandemic and related economic repercussions could have a significant adverse effect on our financial position and business condition, as well as our clients and suppliers. Additionally, these events may, among other factors, impact our ability to generate cash flows from operations, access the capital markets on acceptable terms or at all, and affect our future need or ability to borrow under our ABL Credit Facility. In addition to our current sources of funding our business, the effects of such events may impact our liquidity or our need to revise our allocation or sources of capital, implement further cost reduction measures and/or change our business strategy. ABL Facility. On December 18, 2020, we entered into an asset-based credit agreement (such agreement, as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”) led by Citibank, N.A. (“Citibank”), as agent, which provides for available borrowings up to $150 million (the “ABL Facility”). The ABL Facility matures and all outstanding amounts become due and payable on December 18, 2024. However, if our Notes, which mature on August 1, 2023, have an aggregate principal amount of $10 million (updated from $50.0 million to $10.0 million as part of the Third Amendment to the Term Loan) or more outstanding 120 days prior to their maturity date (the “Trigger Date”), or if there are Notes in an aggregate principal amount of less than $10 million outstanding and we do not have sufficient availability of more than 20% under the ABL Facility on the Trigger Date, the ABL Facility will terminate on the Trigger Date. The ABL Facility includes a $50 million sublimit for letters of credit issuance and $35 million sublimit for swingline borrowings. Additionally, subject to certain conditions, including obtaining additional commitments, the ABL Facility may be increased by an amount not to exceed $50 million. On December 8, 2021, the Company entered into Amendment No. 2 (the “ABL Amendment No. 2”) to the Credit Agreement. ABL Amendment No. 2, among other things, (i) revises the applicable margin to 4.25% for LIBOR rate advances, (ii) provides that at all times beginning on the effective date of the ABL Amendment No. 2 and ending on the date Citibank shall have received and approved the borrowing base certificate for the calendar month ending December 31, 2021, the borrowing base shall not exceed the lesser of (a) the borrowing base calculated as set forth in the borrowing base certificate for the calendar month ending December 31, 2021 and (b) $108,500,000, (iii) establishes an interest reserve account for certain payments due under the Term Loan Credit Agreement, (iv) provides that after giving effect to any borrowing and any disbursements to be made by the Company with the proceeds of such borrowing, within one business day of such borrowing, the Company and its U.S. subsidiaries may not have more than $5 million cash on hand, (v) provides for weekly variance testing to be delivered to Citibank, (vi) requires the Company to have used all of the proceeds borrowed under the Subordinated Term Loan Credit Agreement prior to borrowing under the Credit Agreement, and (vii) increases the amount of subordinated debt available to be incurred by the Company to account for (a) the additional $27.5 million borrowed under the Subordinated Term Loan Credit Agreement, (b) any additional amount borrowed under the Subordinated Term Loan Credit Agreement not to exceed $75 million in the aggregate, and (c) the payment of interest in the form of payment-in-kind interest with respect to the Initial Term Loans (as defined in the Subordinated Term Loan Credit Agreement). 37 Table of Content Our obligations under the ABL Facility are guaranteed by certain of our direct and indirect subsidiaries, as set forth in the ABL Facility agreement. The ABL Facility is secured on a first priority basis by, among other things, our accounts receivable, deposit accounts, securities accounts and inventory, including those of our direct and indirect subsidiary guarantors, and on a second priority basis by substantially all other assets of our direct and indirect subsidiary guarantors. Borrowing availability under the ABL Facility is based on a percentage of the value of accounts receivable and inventory, reduced for certain reserves. Borrowings under the ABL Facility bear interest through maturity at a variable rate based upon, at our option, an annual rate of either a base rate (“Base Rate”) or a LIBOR rate, plus an applicable margin. The Base Rate is defined as a fluctuating interest rate equal to the greatest of (i) the federal funds rate plus 0.50%, (ii) Citibank’s prime rate, and (iii) the one-month LIBOR rate plus 1.00%. The applicable margin for LIBOR borrowings is 4.25% and for Base Rate borrowings is 3.25%. The all-in Base Rate floor is 1.75% and for LIBOR rate borrowings, the LIBOR rate, exclusive of spread, has a 0.75% LIBOR rate floor. Interest is payable either (i) monthly for Base Rate borrowings or (ii) the last day of the interest period for LIBOR rate borrowings, as set forth in the ABL Facility agreement. The fee for undrawn amounts ranges from 0.375% to 0.5%, depending on usage and is due quarterly. The ABL Facility contains customary conditions to borrowings, events of default and covenants, including, but not limited to, covenants that restrict our ability to sell assets, makes changes to the nature of our business, engage in mergers and acquisitions, incur, assume or permit to exist additional indebtedness and guarantees, create or permit to exist liens, pay dividends, issue equity instruments, make distribution or redeem or repurchase capital stock. In the event that our excess availability is less than the greater of (i) $15.0 million and (ii) 10.00% of the lesser of (1) the current borrowing base and (2) the commitments under the ABL Facility then in effect, a consolidated fixed charge coverage ratio of at least 1.00 to 1.00 must be maintained. Upon the occurrence of certain events of default, an additional 2.0% interest maybe required on the outstanding loans under the ABL Facility. At December 31, 2021, we had $65.3 million of cash on hand, of which, $4.1 million was restricted for interest due on the Term Loan and about $4.0 million of cash is located in countries where currency restrictions exist. We had approximately $4.2 million of available borrowing capacity under the ABL Facility. Direct and incremental costs associated with the issuance of the ABL Facility were approximately $4.8 million and were capitalized as debt issuance costs. These costs are being amortized on a straight-line basis over the term of the ABL Facility. On February 11, 2022, we entered into a new credit agreement (such agreement, the ABL Credit Agreement) (the “ABL Credit Facility”) with the lender parties thereto, and Eclipse Business Capital, LLC, a Delaware limited liability company, as agent, (“Eclipse”). Available funding commitments to us under the ABL Credit Agreement, subject to certain conditions, include a revolving credit line in an amount of up to $130.0 million to be provided by certain affiliates of Eclipse (the “Revolving Credit Loans”), with a $35.0 million sublimit for swingline borrowings and a $26.0 million sublimit for issuances of letters of credit, and an incremental delayed draw term loan of up to $35.0 million (the “Delayed Draw Term Loans”) to be provided by Corre Partners Management, LLC and certain of its affiliates (“Corre”) (the “ABL Credit Facility”). The ABL Credit Facility matures and all outstanding amounts become due and payable on February 11, 2025, however, the ABL Credit Facility is subject to the Trigger Date as noted above. The proceeds of the loans under the ABL Credit Facility were used to, among other things, pay off the amounts owed under the Credit Agreement, which was repaid and terminated in full on February 11, 2022. Our obligations under the ABL Credit Facility are guaranteed by certain of our direct and indirect subsidiaries (other than certain excluded subsidiaries) (the “ABL Guarantors” and, together with the Company, the “ABL Loan Parties”). Our obligations under the ABL Credit Facility are secured on a first priority basis by, among other things, accounts receivable, deposit accounts, securities accounts and inventory of the ABL Loan Parties and are secured on a second priority basis by substantially all of the other assets of the ABL Loan Parties. Availability under the revolving credit line under ABL Credit Facility is based on the percentage of the value of accounts receivable and inventory, as reduced by certain reserves. Revolving Credit Loans under the ABL Credit Facility bear interest through maturity at a variable rate based upon an annual rate of a LIBOR Rate (or a Base Rate (as defined below) if the LIBOR Rate is unavailable for any reason), plus an applicable margin (“LIBOR Rate Loan” and “Base Rate Loan”, respectively). The “Base Rate” is defined as a fluctuating interest rate equal to the greatest of (1) the federal funds rate plus 0.50%, (2) Wells Fargo Bank, National Association’s prime rate, and (3) the one-month LIBOR Rate. The “applicable margin” is defined as a rate of 3.15%, 3.40% or 3.65% for Base Rate Loans with a 2.00% Base Rate floor and a rate of 4.15%, 4.40% or 4.65% for LIBOR Rate Loans with a 1.00% LIBOR floor, in each case depending on the amount of EBITDA as of the most recent measurement period, as reported in a monthly compliance certificate. The Delayed Draw Term Loans shall bear interest through maturity at a rate of the LIBOR Rate plus 10.0%, with a 1.00% LIBOR floor. The fee for undrawn revolving amounts is 0.50% and the fee for undrawn Delayed Draw Term Loan amounts is 3.00%. Interest under the ABL Credit Facility is payable monthly. We will also be required to pay customary letter of credit fees, as necessary. We may make voluntary prepayments of the loans under the ABL Credit Facility from time to time, 38 Table of Content subject, in the case of the Delayed Draw Term Loans, to certain conditions. Mandatory prepayments are also required in certain circumstances, including with respect to the Delayed Draw Term Loan, if the ratio of aggregate value of the collateral under the ABL Credit Facility to the sum of the Delayed Draw Term Loans plus revolving facility usage outstanding is less than 130%. Amounts repaid may be re-borrowed, subject to compliance with the borrowing base and the other conditions set forth in the ABL Credit Facility, subject, in the case of the Delayed Draw Term Loans to a maximum of four such borrowings in any 12-month period. Certain permanent repayments of the ABL Credit Facility loans are subject to the payment of a premium of 2.00% during the first year of the facility, 1.00% during the second year of the facility, and 0.50% in the last year of the facility. The ABL Credit Agreement contains customary conditions to borrowings and covenants, including covenants that restrict our ability to sell assets, make changes to the nature of our business, engage in mergers or acquisitions, incur, assume or permit to exist additional indebtedness and guarantees, create or permit to exist liens, pay dividends, issue equity instruments, make distributions or redeem or repurchase capital stock or make other investments, engage in transactions with affiliates and make payments in respect of certain debt. The ABL Credit Agreement also requires that we will not exceed $20.0 million in unfinanced capital expenditures in any calendar year; provided that this requirement will not apply if we maintain a net leverage ratio of less than or equal to 4.00 to 1.00 as of the end of the second and fourth fiscal quarter of each calendar year. In addition, the ABL Credit Agreement includes customary events of default, the occurrence of which may require that we pay an additional 2.0% interest on the outstanding loans under the ABL Credit Agreement. Atlantic Park Term Loan. On December 18, 2020, we also entered into that certain Term Loan Credit Agreement (the “Term Loan Credit Agreement”) with the financial institutions from time to time party thereto, and APSC, as agent, pursuant to which we borrowed a $250.0 million term loan (the “Term Loan”). The Term Loan was issued with a 3.00% original issuance discount (“OID”), such that total proceeds received were $242.5 million. The Term Loan matures, and all outstanding amounts become due and payable on December 18, 2026. However, certain conditions could result in an earlier maturity, including if the Notes have an aggregate principal amount outstanding of $10.0 million or more on the Trigger Date, in which case the Term Loan will terminate on the Trigger Date. As set forth in the Term Loan Credit Agreement, the Term Loan is secured by substantially all assets, other than those secured on a first lien basis by the ABL Facility, and we may increase the Term Loan by an amount not to exceed $100 million. The Term Loan bears an interest through maturity at a variable rate based upon, at our option, an annual rate of either a Base rate or a LIBOR rate, plus an applicable margin. The Base rate is defined as a fluctuating interest rate equal to the greatest of (i) the federal funds rate plus 0.50%, (ii), the prime rate as specified in the Term Loan Credit Agreement, and (iii) one-month LIBOR rate plus 1.00%. The applicable margin is defined as a rate of 6.50% for Base rate borrowings with a 2.00% Base rate floor and 7.50% for LIBOR rate borrowings with a 1.00% LIBOR rate floor. Interest is payable either (i) monthly for Base rate borrowings or (ii) the last day of the interest period for LIBOR rate borrowings, as set forth in the Term Loan Credit Agreement. The loans under the Term Loan were issued with an original issue discount of 3.00%, and are, in whole or in part, prepayable any time and from time to time, at a prepayment premium (including a make whole during the first two years) specified in the Term Loan Credit Agreement (subject to certain exceptions), plus accrued and unpaid interest. The effective interest rate on the Term Loan at December 31, 2021 was 20.90%. The Term Loan contains customary payment penalties, events of default and covenants, including but not limited to, covenants that restrict our ability to sell assets, make changes to the nature of our business, engage in mergers or acquisitions, incur additional indebtedness and guarantees, pay dividends, issue equity instruments and make distributions or redeem or repurchase capital stock. On October 19, 2021, we entered into Amendment No. 1 (the “First Amendment”) to the Term Loan Credit Agreement with the financial institutions party thereto from time to time (the “Lenders”) and APSC, as agent. The First Amendment, among other things, (i) deferred an October 19, 2021 interest payment until October 29, 2021; (ii) required that the Company use commercially reasonable efforts to appoint an additional independent director to our Board of Directors who is acceptable to the agent; (iii) provided the Lenders with additional information rights; and (iv) tightened certain negative covenants included in the Term Loan Credit Agreement until the deferred interest is made current. On October 29, 2021, we entered into Amendment No. 2 (the “Second Amendment”) to the Term Loan Credit Agreement. The Second Amendment, among other things, (i) further deferred an October 29, 2021 interest payment until November 15, 2021; (ii) contained certain milestones; (iii) provided the Lenders with a 10-day right of first refusal regarding any refinancing of the Company’s obligations under the ABL Facility; (iv) obligated the Company to establish, pursuant to a charter to be adopted by the our Board of Directors and reasonably acceptable to the Agent, a special committee that shall have exclusive responsibility and authority to make recommendations to our Board of Directors regarding certain transactions; and (v) provided that the Company will not permit a covenant trigger event under the ABL Facility to occur. 39 Table of Content On November 8, 2021, we entered into Amendment No.3 (the “Third Amendment”) to the Term Loan Credit Agreement. The Third Amendment, among other things, (i) waived certain covenants until September 30, 2022 and modified covenants thereafter to provide us with more flexibility and (ii) required us to seek shareholder approval (or an exception therefrom) to issue the APSC Warrants, and to amend the Existing Warrants, to provide for, an exercise price of $1.50 per share. The Third Amendment also reduced the amount of principal outstanding on the Notes on the Trigger date from $50 million to $10 million. On December 2, 2021 and December 7, 2021, respectively, we entered into Amendment No. 4 (the “Fourth Amendment”) to the Term Loan Credit Agreement and Amendment No. 5 (the “Fifth Amendment”) to the Term Loan Credit Agreement, respectively. The Fourth and Fifth Amendments extended the date upon which the Company must issue the APSC Warrants to December 7, 2021 and December 8, 2021, respectively. The business purpose of these amendments was to further extend the Company’s liquidity runway while field audit exams were completed in connection to the transactions completed on February 11, 2022. On December 8, 2021 we entered into the Second Amended and Restated Common Stock Purchase Warrant No. 1 (the “Second A&R Warrant”) with APSC Holdco, pursuant to which the A&R Warrant was amended and restated to provide for the purchase of up to 5,000,000 shares of our common stock (including 4,082,949 shares of our common stock issuable pursuant to the A&R Warrant) exercisable at the holder’s option at any time, in whole or in part, until December 8, 2028, at an exercise price of $1.50 per share, and (ii) entered into the Common Stock Purchase Warrants with each of Corre Opportunities Qualified Master Fund, LP, Corre Horizon Fund, LP and Corre Horizon Fund II, LP providing for the purchase of an aggregate of 5,000,000 shares of our common stock, exercisable at such holder’s option at any time, in whole or in part, until December 8, 2028, at an exercise price of $1.50 per share (the “Corre Warrants”). On February 11, 2022, we entered into Amendment No. 6 (the “Sixth Amendment”) to the Term Loan Credit Agreement. The Sixth Amendment, among other things and subject to the terms thereof, (i) permits the entry into the ABL Credit Agreement, (ii) permits certain interest payments due under the Term Loan Credit Agreement to be paid in kind, (iii) permits certain asset sales and requires certain related mandatory prepayments, subject to an applicable prepayment premium, and (iv) amends the financial covenants, such that the maximum net leverage ratio of 7.00 to 1.00 will not be tested until the fiscal quarter ending March 31, 2023, and the Company is not permitted to exceed $20.0 million in unfinanced capital expenditures in any calendar year; provided, that this unfinanced capital expenditures requirement will not apply if the Company maintains a net leverage ratio of less than or equal to 4.00 to 1.00 as of the end of the second and fourth fiscal quarter of each calendar year. Subordinated Term Loan Credit Agreement . On November 9, 2021, we entered into a credit agreement (the “Subordinated Term Loan Credit Agreement”) with Corre Credit Fund, LLC (“Corre Fund”), as agent, and the lenders party thereto providing for an unsecured $50.0 million delayed draw subordinated term loan facility (the “Subordinated Term Loan”). Pursuant to the Subordinated Term Loan Credit Agreement, we borrowed $22.5 million on November 9, 2021, and an additional $27.5 million on December 8, 2021. The Subordinated Term Loan matures, and all outstanding amounts become due and payable, on the earlier of December 31, 2026 and the date that is two weeks later than the maturity or full repayment of the Term Loan. The stated interest rate on the Subordinated Term Loan is 12%. Under the Subordinated Term Loan Credit Agreement, we are required to, among other things, (i) subject to certain conditions, issue the lenders Corre Warrants, (ii) amend our charter, bylaws, and all other necessary corporate governance documents to reduce the size of our Board of Directors to seven directors, one of whom will include our Chief Executive Officer, and (iii) reconstitute our Board of Directors. The Subordinated Term Loan also contains other customary prepayment provisions, events of default and covenants. On November 30, 2021, we entered into Amendment No. 1 (the “Corre Amendment 1”) to the Subordinated Term Loan Credit Agreement. The Corre Amendment 1 (i) extended the payment date for interest in the form of payment-in-kind interest (“PIK Interest”) with respect to the Initial Term Loans (as defined in the Subordinated Term Loan Credit Agreement), (ii) extended the date upon which the Company must deliver a fully executed ABL Consent (as defined in the Subordinated Term Loan Credit Agreement) to, in each case, 11:59 P.M. on December 6, 2021 and (iii) extended the date upon which we must issue the Corre Warrants to 11:59 P.M. on December 7, 2021. On December 6, 2021, we entered into Amendment No. 2 (the “Corre Amendment 2”) to the Subordinated Term Loan Credit Agreement. The Corre Amendment 2 (i) extended the payment for interest in the PIK Interest with respect to the Initial Term Loans, and (ii) extended the date upon which we must deliver a fully executed ABL Consent to, in each case, 11:59 P.M. on December 7, 2021. On December 7, 2021, we entered into Amendment No. 3 (the “Corre Amendment 3”) to the Subordinated Term Loan Credit Agreement. The Corre Amendment 3, among other things, (i) extended the payment date for interest in the form of PIK Interest with respect to the Initial Term Loans, (ii) extended the date upon which we must deliver a fully executed ABL Consent and (iii) extended the date upon which we must issue the Corre Warrants to, in each case, 11:59 P.M. on December 8, 2021. 40 Table of Content The business purpose of each of the Corre Amendments was to further extend the liquidity runway of the Company and support ongoing negotiations of the financing transactions completed on February 11, 2022. On December 8, 2021, we entered into Amendment No. 4 (the “Corre Amendment 4”) to the Subordinated Term Loan Credit Agreement. The Corre Amendment 4 appointed Cantor Fitzgerald Securities as successor Agent. In connection with the transactions contemplated by the ABL Credit Agreement on February 11, 2022, Corre agreed to provide the Company incremental financing (the “Incremental Financing”), totaling $55.0 million, consisting of (i) $35 million Delayed Draw Term Loans; (ii) $10.0 million from Corre in the form of the February 2022 Delayed Draw Term Loan (as defined in the Subordinated Term Loan Credit Agreement ) on a pari passu basis with the existing loans issued pursuant to the Subordinated Term Loan Credit Agreement; and (iii) $10.0 million through an issuance of 11,904,762 shares (the “PIPE Shares”) of the our common stock, to Corre Opportunities Qualified Master Fund, LP, Corre Horizon Fund, LP and Corre Horizon II Fund, LP (the “Corre Holders”) at a price of $0.84 per share (the “Equity Issuance”). In connection with the Incremental Financing and Equity Issuance, on February 11, 2022, we entered into a common stock subscription agreement (the “Subscription Agreement”) with the Corre Holders, pursuant to which we issued and sold the PIPE Shares to the Corre Holders on February 11, 2022. Pursuant to the Subscription Agreement, subject to certain exceptions, each of the Corre Holders has agreed not to sell its portion of the PIPE Shares until the earliest to occur of (i) the date that is 180 days from the date of the Subscription Agreement, and (ii) such date on which we complete a liquidation, merger, stock exchange, reorganization or other similar transaction that results in all of our stockholders having the right to exchange their shares of our common stock for cash, securities or other property, without our consent. On February 11, 2022, we entered into Amendment No. 5 (the “Corre Amendment 5”) to the Subordinated Term Loan Credit Agreement with the lenders from time to time party thereto (including Corre), and Cantor Fitzgerald Securities, as agent. The Corre Amendment 5, among other things, (i) provides for the February 2022 Delayed Draw Term Loan in the form of an additional commitment of $10.0 million in subordinated delayed draw term loans to be available for borrowing by the Company until July 1, 2022, (ii) permits the entry into the ABL Credit Agreement, (iii) permits certain asset sales and requires certain related mandatory prepayments, subject to an applicable prepayment premium, and (iv) amends the financial covenants, such that the maximum net leverage ratio of 7.00 to 1.00 will not be tested until the fiscal quarter ending March 31, 2023, and the Company is not permitted to exceed $20.0 million in unfinanced capital expenditures in any calendar year; provided, that this unfinanced capital expenditures requirement will not apply if the Company maintains a net leverage ratio of less than or equal to 4.00 to 1.00 as of the end of the second and fourth fiscal quarter of each calendar year. Our ability to maintain compliance with the financial covenants contained in the ABL Credit Agreement, the Term Loan Credit Agreement and the Subordinated Term Loan Credit Agreement is dependent upon our future operating performance and future financial condition, both of which are subject to various risks and uncertainties. The effects of the COVID-19 pandemic and the resulting economic repercussions could have a significant adverse effect on our financial position and business condition, as well as our clients and suppliers. Additionally, these events may, among other factors, impact our ability to generate cash flows from operations, access the capital markets on acceptable terms or at all, and affect our future need or ability to borrow under our ABL Credit Facility. In addition to our current sources of funding our business, the effects of such events may impact our liquidity or our need to revise our allocation or sources of capital, implement further cost reduction measures and/or change our business strategy. Although the COVID-19 pandemic and resulting economic repercussions could have a broad range of effects on our liquidity sources, the effects will depend on future developments and cannot be predicted at this time. In order to secure our casualty insurance programs, we are required to post letters of credit generally issued by a bank as collateral. A letter of credit commits the issuer to remit specified amounts to the holder, if the holder demonstrates that we failed to meet our obligations under the letter of credit. If this were to occur, we would be obligated to reimburse the issuer for any payments the issuer was required to remit to the holder of the letter of credit. We were contingently liable for outstanding stand-by letters of credit totaling $23.5 million at December 31, 2021 and $19.5 million at December 31, 2020. Outstanding letters of credit reduced amounts available under our ABL Facility and are considered as having been funded for purposes of calculating our financial covenants. Debt Issuance Costs. Direct and incremental costs associated with the issuance of the Term Loan were approximately $6.5 million and were capitalized as debt issuance costs. Direct and incremental costs associated with the Subordinated Term Loan were approximately $14.8 million and were capitalized as debt issuance costs. The debt issuance costs and the OID will be amortized using the effective interest method over the term of the Term Loan and Subordinated Term Loan. 41 Table of Content Convertible Senior Notes. On July 31, 2017, we issued $230.0 million principal amount of senior unsecured 5.00% Convertible Senior Notes due 2023 in a private offering to qualified institutional buyers (as defined in the Securities Act) pursuant to Rule 144A under the Securities Act. As discussed above, in December 2020, we retired $136.9 million par value of the Notes, and as of December 31, 2020, the principal amount of Notes outstanding was $93.1 million. The Notes bear interest at a rate of 5.0% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning on February 1, 2018. The Notes mature on August 1, 2023 unless repurchased, redeemed or converted in accordance with their terms prior to such date. The Notes are convertible at an initial conversion rate of 46.0829 shares of our common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $21.70 per share, which represents a conversion premium of 40% to the last reported sale price of $15.50 per share on the NYSE on July 25, 2017, the date the pricing of the Notes was completed. The conversion rate, and thus the conversion price, may be adjusted under certain circumstances as described in the indenture governing the Notes. Holders may convert their Notes at their option prior to the close of business on the business day immediately preceding May 1, 2023, but only under the following circumstances: • during any calendar quarter commencing after the calendar quarter ending on December 31, 2017 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; • during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on such trading day; • if we call any or all of the Notes for redemption, at any time prior to the close of business on the business day immediately preceding the redemption date; or; • upon the occurrence of specified corporate events described in the indenture governing the Notes. On or after May 1, 2023 until the close of business on the business day immediately preceding the maturity date, holders may, at their option, convert their Notes at any time, regardless of the foregoing circumstances. As a result of the redemption and extinguishment of the Notes discussed above, the Notes are convertible into 4,291,705 shares of common stock. The Notes will be convertible into, subject to various conditions, cash or shares of our common stock or a combination of cash and shares of common stock, in each case, at our election. If holders elect to convert the Notes in connection with certain fundamental change transactions described in the indenture governing the Notes, we will, under certain circumstances described in the indenture governing the Notes, increase the conversion rate for the Notes so surrendered for conversion. As per the agreement, we may not redeem the Notes prior to August 5, 2021. The agreement noted that we will have the option to redeem all or any portion of the Notes on or after August 5, 2021, if certain conditions were met (including that our common stock is trading at or above 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption) at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Net proceeds received from the Offering were approximately $222.3 million after deducting discounts, commissions and expenses. On January 13, 2022, we entered into a supplemental indenture with Truist Bank, as trustee, (the “Supplemental Indenture”) to the indenture (the “Indenture”) governing the Notes to effect certain amendments (the “Amendments”) to the Indenture and to modify the Notes held by consenting holders (the “Consenting Holders”) of $51,969,000 in aggregate principal amount of the Notes (such modified Notes, the “PIK Securities”). The Supplemental Indenture amends the Indenture to, among other things: (i) allow for interest payable on the PIK Securities on February 1, 2022 to be paid in PIK Interest (as defined in the Supplemental Indenture) and on subsequent interest payment dates to be payable, at the Company’s option, at a rate of 5.00% per annum entirely in cash or at a rate of 8.00% per 42 Table of Content annum in PIK Interest; (ii) provide for additional changes to the Indenture to allow for the payment of PIK Interest and for the PIK Securities to be issued in denominations of $1,000 and integral multiples thereof (or if PIK Interest has been paid with respect to the PIK Securities, in minimum denominations of $1.00 and integral multiples of $1.00 in excess thereof); (iii) clarify that the unmodified Notes and PIK Securities will be treated as a single series of Notes for all purposes under the Indenture, other than the option of the Company to pay PIK Interest on the PIK Securities; and (iv) make certain conforming changes, including conforming modifications to certain definitions and cross-references as a result of such amendments. Notes held by holders other than the Consenting Holders were not modified and interest on such Notes will continue to be paid in cash at a rate of 5.00% per annum as set forth in the Indenture. Cash and cash equivalents. Our cash and cash equivalents at December 31, 2021 totaled $65.3 million, of which $4.1 million was restricted for interest due on the Atlantic Park Term Loan. Additionally, $23.8 million of the $65.3 million of cash and cash equivalents was in foreign accounts, primarily in the Europe, Canada and Australia including $4.0 million of cash located in countries where currency restrictions exist. Cash flows attributable to our operating activities. For the year ended December 31, 2021, net cash used in operating activities was $35.5 million. Although we incurred a net loss of $186.0 million, the goodwill impairment of $64.6 million, the effect of depreciation and amortization of $41.5 million, a decrease in working capital of $18.8 million, non-cash compensation cost of $7.0 million, amortization of debt issuance costs and debt discount of $13.8 million and deferred income taxes of $4.5 million primarily due to net tax refunds, resulted in negative operating cash flow. For the year ended December 31, 2020, net cash provided by operating activities was $52.8 million. Although we incurred a net loss of $237.2 million, the goodwill impairment of $191.8 million, the effect of depreciation and amortization of $45.9 million, a decrease in working capital of $37.3 million, non-cash compensation cost of $6.3 million, amortization of debt issuance costs and debt discount of $8.8 million and deferred income taxes of $4.0 million primarily due to net tax refunds, resulted in positive operating cash flow. For the year ended December 31, 2019, net cash provided by operating activities was $58.8 million. Although we incurred a net loss of $32.4 million, the effect of depreciation and amortization of $49.1 million, a decrease in working capital of $25.0 million, non-cash compensation cost of $10.1 million, amortization of debt issuance costs and debt discount of $7.7 million and deferred income taxes of $3.8 million primarily due to net tax refunds, resulted in positive operating cash flow. Cash flows attributable to our investing activities. For the year ended December 31, 2021, net cash used in investing activities was $14.1 million, consisting primarily of $17.6 million of capital expenditures. For the years ended December 31, 2020 and 2019, net cash used in investing activities was $18.3 million and $28.1 million, respectively, consisting primarily of $20.0 million and $29.0 million, respectively, of capital expenditures. Capital expenditures can vary depending upon specific client needs that may arise unexpectedly. Cash flows attributable to our financing activities. For the year ended December 31, 2021, net cash provided by in financing activities was $91.9 million, consisting primarily of $137.0 million of payments under the ABL Facility, $10.5 million of term loan debt issuance costs, and $0.2 million in withholding tax payments related to share-based compensation, partially offset by gross borrowings on our ABL Facility of $128.0 million and borrowings of $50.0 million under the Subordinated Term Loan. For the year ended December 31, 2020, net cash used in financing activities was $23.5 million, consisting primarily of $126.6 million net debt repayments under the Credit Facility, $135.5 million for partial extinguishment of convertible debt, $35.0 million of payments under the ABL Facility, $9.1 million of term loan debt issuance costs, $2.4 million of debt extinguishment costs, and $1.0 million in withholding tax payments related to share-based compensation, partially offset by net borrowings on our Term Loan of $242.5 million and net borrowings on our ABL Facility of $44.0 million. For the year ended December 31, 2019, net cash used in financing activities was $36.8 million, consisting primarily of $82.4 million net debt repayments under the revolving portion of our Credit Facility, $1.9 million in withholding tax payments related to share-based compensation, $0.4 million in contingent consideration payments and $1.5 million of Credit Facility debt issuance costs, partially offset by net borrowings on our Credit Facility term loan of $49.7 million. Effect of exchange rate changes on cash. For the year ended December 31, 2021, the effect of foreign exchange rate changes on cash was a negative impact of $1.6 million. The negative impact in the current year is primarily attributable to unfavorable fluctuations in U.S. Dollar exchange rates with the Canadian Dollar, the Euro, the British Pound the Australian Dollar and Mexican Peso. 43 Table of Content For the years ended December 31, 2020 and 2019, the effect of foreign exchange rate changes on cash was a positive impact of $1.4 million and negative impact of $43.0 thousand, respectively. The positive impact in the 2020 is primarily attributable to unfavorable fluctuations in U.S. Dollar exchange rates with the Canadian Dollar, the Euro, the British Pound the Australian Dollar and Mexican Peso. The impact in 2019 periods is primarily attributable to fluctuations in U.S. Dollar exchange rates with the Canadian Dollar, Australian Dollar, the British Pound, the Euro and the Brazilian Real. 44 Table of Content Critical Accounting Policies The process of preparing financial statements in accordance with GAAP requires our management to make estimates and judgments. It is possible that materially different amounts could be recorded if these estimates and judgments change or if actual results differ from these estimates and judgments. We believe that the following critical accounting policies comprise the more significant estimates and assumptions used in the preparation of our consolidated financial statements. Revenue from contracts with customers. The majority of our revenues are derived from providing services on a time and material basis and are short-term in nature. We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. Revenue is recognized as (or when) the performance obligations are satisfied by transferring control over a service or product to the customer. As most of our contracts contain only one performance obligation, the allocation of a contract’s transaction price to multiple performance obligations is generally not applicable. For our time and materials contracts, we are generally able to elect the right-to-invoice practical expedient, which permits us to recognize revenue in the amount to which we have a right to invoice the customer if that amount corresponds directly with the value to the customer of our performance completed to date. For our fixed price contracts, we typically recognize revenue using the cost-to-cost method, which measures the extent of progress towards completion based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Under this method, revenue is recognized proportionately as costs are incurred. For contracts where control is transferred at a point in time, revenue is recognized at the time control of the asset is transferred to the customer, which is typically upon delivery and acceptance by the customer. Certain contracts may also contain a combination of fixed and variable pricing elements. Generally, in contracts where the amount of consideration is variable, the amount is determinable each period based on our right to invoice the customer for services performed to date. Goodwill. Goodwill represents the excess purchase price of acquired businesses over the fair values attributed to underlying net tangible assets and identifiable intangible assets. We test goodwill each year on December 1 for impairment at a reporting unit level. Goodwill is also tested for impairment whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. An assessment can be performed by first completing a qualitative assessment on none, some, or all of our reporting units. We can also bypass the qualitative assessment for any reporting unit in any period and proceed directly to the quantitative impairment test, and then resume the qualitative assessment in any subsequent period. Qualitative indicators that may trigger the need for annual or interim quantitative impairment testing include, among other things, deterioration in macroeconomic conditions, declining financial performance, deterioration in the operational environment, or an expectation of selling or disposing of a portion of a reporting unit. Additionally, a significant change in business climate, a loss of a significant client, increased competition, a sustained decrease in share price, or a decrease in our market capitalization below book value may trigger the need for interim impairment testing of goodwill associated with one or more of our reporting units. If we believe that, as a result of our qualitative assessment, it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. The quantitative test involves comparing the fair value of each of our reporting units with its carrying amount, including goodwill. During the third and fourth quarter of 2021, our assessment of qualitative indicators associated with our interim and annual goodwill impairment tests indicated an impairment existed as the carrying value of the MS and Quest Integrity reporting units, respectively, exceeded its fair value. See Note 8 in the notes to consolidated financial statements for further details. Income taxes. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted rates in effect for the year in which the differences are expected to reverse. The effect of the change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be unable to realize our deferred tax assets, we would make an adjustment to the deferred tax asset valuation allowance. 45 Table of Content We establish reserves for uncertain tax positions when it is not more likely than not that the position will be sustained upon challenge. When facts and circumstances change, we adjust these reserves through our provision for income taxes. To the extent interest and penalties may be assessed by taxing authorities on any related underpayment of income tax, such amounts have been accrued and are classified as a component of income tax expense. New Accounting Principles For information about newly adopted accounting principles as well as information about new accounting principles pending adoption, see Note 1 to the consolidated financial statements.